Exam 9: Foreign Currency Transactions and Hedging Foreign Exchange Risk

REFERENCE: Ref.09_09 On March 1,2007,Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds.The machine was shipped and payment was received on March 1,2008.On March 1,2007,Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1,2008 at a price of $380,000.Mattie properly designates the option as a fair hedge of the pound firm commitment.The option cost $2,000 and had a fair value of $2,200 on December 31,2007.The following spot exchange rates apply: Mattie's incremental borrowing rate is 12 percent,and the present value factor for two months at a 12 percent annual rate is .9803. -What was the net impact on Mattie's 2007 income as a result of this fair value hedge of a firm commitment?

REFERENCE: Ref.09_03 Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied: SHAPE \* MERGEFORMAT -A company has a discount on a forward contract for an asset.How is the discount recognized over the life of the contract?

REFERENCE: Ref.09_11 Coyote Corp.(a U.S.company in Texas)had the following series of transactions in a foreign country during 2009.The appropriate exchange rates during 2009 were as follows: The appropriate exchange rates during 2009 were as follows: -What amount will Coyote Corp.report on its 2009 financial statements for Accounts Receivable?

Yelton Co.just sold inventory for 80,000 lira,which Yelton will collect in sixty days.Briefly describe a hedging transaction Yelton could engage in to reduce its risk of unfavorable exchange rates.

REFERENCE: Ref.09_01 Norton Co. ,a U.S.corporation,sold inventory on December 1,2008,with payment of 10,000 British pounds to be received in sixty days.The pertinent exchange rates were as follows: -For what amount should Sales be credited on December 1?

How is the fair value of a Forward Contract determined under SFAS 133?

For each of the following situations,select the best answer concerning accounting for foreign currency transactions: (A)Results in a foreign exchange gain. (B)Results in a foreign exchange loss. (C)No foreign exchange gain or loss. _____1.Export sale by a U.S.company denominated in dollars,foreign currency of buyer appreciates. _____2.Export sale by a U.S.company denominated in foreign currency,foreign currency of buyer appreciates. _____3.Import purchase by a U.S.company denominated in foreign currency,foreign currency of buyer appreciates. _____4.Import purchase by a U.S.company denominated in dollars,foreign currency of buyer appreciates. _____5.Import purchase by a U.S.company denominated in foreign currency,foreign currency of buyer depreciates. _____6.Import purchase by a U.S.company denominated in dollars,foreign currency of buyer depreciates. _____7.Export sale by a U.S.company denominated in dollars,foreign currency of buyer depreciates. _____8.Export sale by a U.S.company denominated in foreign currency,foreign currency of buyer depreciates.

REFERENCE: Ref.09_07 Winston Corp. ,a U.S.company,had the following foreign currency transactions during 2008: (1. )Purchased merchandise from a foreign supplier on July 16,2008 for the U.S.dollar equivalent of $47,000 and paid the invoice on August 3,2008 at the U.S.dollar equivalent of $54,000. (2. )On October 15,2008 borrowed the U.S.dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15,2008.The U.S.dollar equivalent of the note amount was $295,000 on December 31,2008,and $299,000 on October 15,2009. -Atherton,Inc. ,a U.S.company,expects to order goods from a foreign supplier at a price of 100,000 lira,with delivery and payment to be made on April 17.On January 17,Atherton purchased a three-month call option on 100,000 lira and designated this option as a cash flow hedge of a forecasted foreign currency transaction.The following exchange rates apply: What amount will Atherton include as an option expense in net income during the period January 17 to April 17?

REFERENCE: Ref.09_03 Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied: SHAPE \* MERGEFORMAT -A forward contract may be used for which of the following? 1)A fair value hedge of an asset. 2)A cash flow hedge of an asset. 3)A fair value hedge of a liability. 4)A cash flow hedge of a liability.

REFERENCE: Ref.09_03 Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied: SHAPE \* MERGEFORMAT -Mills Inc.had a receivable from a foreign customer that is due in the local currency of the customer (stickles).On December 31,2008,this receivable for §200,000 was correctly included in Mills' balance sheet at $132,000.When the receivable was collected on February 15,2009,the U.S.dollar equivalent was $144,000.In Mills' 2009 consolidated income statement,how much should have been reported as a foreign exchange gain?

REFERENCE: Ref.09_04 On December 1,2007,Keenan Company,a U.S.firm,sold merchandise to Velez Company of Spain for 150,000 euro.Payment is due on February 1,2008.Keenan entered into a forward exchange contract on December 1,2007,to deliver 150,000 euro on February 1,2008 for $.97.Keenan chose to use a foreign currency option to hedge this foreign currency asset designated as a cash flow hedge.Relevant exchange rates follow: -Compute the U.S.dollars received on February 1,2008.

REFERENCE: Ref.09_03 Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied: SHAPE \* MERGEFORMAT -A U.S.company sells merchandise to a foreign company denominated in U.S.dollars.Which of the following statements is true?

REFERENCE: Ref.09_07 Winston Corp. ,a U.S.company,had the following foreign currency transactions during 2008: (1. )Purchased merchandise from a foreign supplier on July 16,2008 for the U.S.dollar equivalent of $47,000 and paid the invoice on August 3,2008 at the U.S.dollar equivalent of $54,000. (2. )On October 15,2008 borrowed the U.S.dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15,2008.The U.S.dollar equivalent of the note amount was $295,000 on December 31,2008,and $299,000 on October 15,2009. -Williams,Inc. ,a U.S.company,has a Japanese yen account receivable resulting from an export sale on March 1 to a customer in Japan.The exporter signed a forward contract on March 1 to sell yen and designated it as a cash flow hedge of a recognized receivable.The spot rate was $.0094,and the forward rate was $.0095.Which of the following did the U.S.exporter report in net income?

REFERENCE: Ref.09_07 Winston Corp. ,a U.S.company,had the following foreign currency transactions during 2008: (1. )Purchased merchandise from a foreign supplier on July 16,2008 for the U.S.dollar equivalent of $47,000 and paid the invoice on August 3,2008 at the U.S.dollar equivalent of $54,000. (2. )On October 15,2008 borrowed the U.S.dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15,2008.The U.S.dollar equivalent of the note amount was $295,000 on December 31,2008,and $299,000 on October 15,2009. -Larson Company,a U.S.company,has an India rupee account receivable resulting from an export sale on September 7 to a customer in India.Larson signed a forward contract on September 7 to sell rupees and designated it as a cash flow hedge of a recognized receivable.The spot rate was $.023,and the forward rate was $.021.Which of the following did the U.S.exporter report in net income?

REFERENCE: Ref.09_10 On October 1,2007,Eagle Company forecasts the purchase of inventory from a British supplier on February 1,2008,at a price of 100,000 British pounds.On October 1,2007,Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound.The option is considered to be a cash flow hedge of a forecasted foreign currency transaction.On December 31,2007,the option has a fair value of $1,600.The following spot exchange rates apply: -What is the amount of Adjustment to Accumulated Other Comprehensive Income for 2008 from these transactions?

What is meant by the spot rate?

REFERENCE: Ref.09_03 Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied: SHAPE \* MERGEFORMAT -Assuming a forward contract was entered into,what would be the net impact on Car Corp.'s 2008 income statement related to this transaction? Assume an annual interest rate of 12% and a fair value hedge.The present value for one month at 12% is .9901.

REFERENCE: Ref.09_07 Winston Corp. ,a U.S.company,had the following foreign currency transactions during 2008: (1. )Purchased merchandise from a foreign supplier on July 16,2008 for the U.S.dollar equivalent of $47,000 and paid the invoice on August 3,2008 at the U.S.dollar equivalent of $54,000. (2. )On October 15,2008 borrowed the U.S.dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15,2008.The U.S.dollar equivalent of the note amount was $295,000 on December 31,2008,and $299,000 on October 15,2009. -On December 1,2009,Joseph Company,a U.S.company,entered into a three-month forward contract to purchase 50,000 pesos on March 1,2010.The following U.S.dollar per peso exchange rates apply: Joseph's incremental borrowing rate is 12 percent.The present value factor for two months at an annual interest rate of 12 percent is .9803.Which of the following is included in Joseph's December 31,2009 balance sheet for the forward contract?

Pigskin Co. ,a U.S.corporation,sold inventory on credit to a British company on April 8,2008.Pigskin received payment of 35,000 British pounds on May 8,2008.The exchange rate was $1 = £0.65 on April 8 and $1 = £0.70 on May 8.What amount of foreign exchange gain or loss should be recognized? (round to the nearest dollar)

REFERENCE: Ref.09_07 Winston Corp. ,a U.S.company,had the following foreign currency transactions during 2008: (1. )Purchased merchandise from a foreign supplier on July 16,2008 for the U.S.dollar equivalent of $47,000 and paid the invoice on August 3,2008 at the U.S.dollar equivalent of $54,000. (2. )On October 15,2008 borrowed the U.S.dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15,2008.The U.S.dollar equivalent of the note amount was $295,000 on December 31,2008,and $299,000 on October 15,2009. -On April 1,Quality Corporation,a U.S.company,expects to order merchandise from a German supplier in three months,denominating the transaction in euros.On April 1,the spot rate is $1.19 per euro,and Quality enters into a three-month forward contract to purchase 400,000 euros at a rate of $1.20.At the end of three months,the spot rate is $1.21 per euro,and Quality orders and receives the merchandise,paying 400,000 euros.What are the effects on net income from these transactions?